GameStop touts digital gains as sales dip

Videogame retailer helped by used games, growing digital business

By

DanGallagher

SAN FRANCISCO (MarketWatch) – GameStop Corp. felt the heat of a weak summer of video game sales as the specialty retailer posted a 23% drop in earnings for the second quarter, with revenue that came in below Wall Street’s expectations for the period.

Electronic Arts Inc.

“Battlefield 3” will be launched in the fall by Electronic Arts.

However, the company also reported about 12% growth in sales for its used game business, which accounts for the largest portion of its gross profits. It also pointed to growth in its smaller digital business, which focuses on selling access to content such as downloadable expansion packs, to its hard-core gamer customers.

Shares of GameStop turned up nearly 2% by late Thursday afternoon after dropping nearly 10% earlier in the session.

For the quarter ended July 30, GameStop
GME, +0.19%
posted earnings of $30.9 million, or 22 cents a share, compared with earnings of $40.3 million, or 26 cents a share, for the same period last year. Total sales fell about 3% to $1.74 billion.

Analysts had expected about $1.83 billion in sales for the quarter, though earnings came in line with consensus estimates from Thomson Reuters.

Expectations had been relatively muted before the report, since the last three months of data from the NPD Group have also shown relatively weak performance for video game software and hardware through traditional retail outlets. Total industry sales for the May-July quarter were down 13% from the same period last year, NPD’s numbers showed.

Nintendo 3DS boosted by price cut

Investors had been anticipating weakness at GameStop; before Thursday, the stock had fallen about 25% since the company’s last earnings report.

Arvind Bhatia of Sterne Agee said the results indicate that GameStop was able to gain market share during the quarter, despite the weakness across the game sector.

“People need to understand here that the areas of the highest margin are growing,” he said in an interview, noting the gains in used game sales and the digital business. “Right now, the shares are trading on the headline sales number.”

Among the challenges for GameStop in the second quarter was a challenging comparison to the same period last year, when the company benefitted from popular titles such as “Red Dead Redemption” from Take-Two Interactive
TTWO, +0.24%
, “Super Mario Galaxy” from Nintendo
NTDOY, +2.43%
(7974) and “StarCraft II” from Activision Blizzard
ATVI, -1.60%
.

The top-selling titles in the most recent period included Take-Two’s “L.A. Noire,” “NCAA Footbal 12” from Electronic Arts
ERTS
and “Infamous 2” from Sony
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(6758)

Partially offsetting weak sales of new games and hardware, GameStop said pre-owned sales grew by 12% to $633.1 million for the quarter.

Sales are expected to pick up in the third quarter, heading into the start of the holiday season, with high-profile releases such as “Gears of War 3” and the latest “Madden NFL.” The fourth quarter will include blockbusters such as “Call of Duty: Modern Warfare 3,” “Battlefield 3” and “Star Wars: The Old Republic.”

In an interview on Thursday, GameStop president Tony Bartel said the company has seen more “million-plus reservation titles” for games coming out in the latter half of the year than it has at any prior time in the company’s history.

Also, price cuts on game consoles are expected to juice up sales. Sony cut the price of its PlayStation 3 by $50 earlier this week, while Nintendo has slashed the price of its 3DS handheld in an effort to kick-start the console, which has been a disappointment since its launch earlier this year. Many analysts expect Microsoft Corp. to trim the price of its Xbox 360 sometime before the holidays as well.

GameStop forecast earnings per share in the range of 38-41 for the third quarter, roughly in line with analysts prior forecasts.

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